Pöyry Management Consulting Oy

Have the trade regulations between US and China impact on the tissue industry?

Author: Lei Wang, Pirkko Petäjä and Mikko Helin, Pöyry Management Consulting

Summary

2019 will continue to be a turbulent year for both the US and Chinese tissue producers. The uncertainties caused by the trade war and RCP ban in the fibre supply end will continue to affect tissue producers. However, it seems that the US tissue producers will benefit from the situation. Both the trade war and RCP ban will result in surplus fiber supply in the US domestic market meaning fiercer price competition which is in favor of the tissue producers. Low RCP prices will benefit particularly the AfH and private label segments. The same segments will also (at least locally) benefit of the 25% tariffs and consequent declining volumes of Chinese finished product volumes exported to the US. On the contrary, the trade war and RCP ban will probably have a negative impact on the Chinese tissue industry, though not very significant. The reduced RCP import can be fairly easily replaced by other alternative fibre sources as RCP only represent a small fraction of the fiber consumed by the Chinese tissue industry. However, the fibre shortage caused by RCP ban has caused the domestic RCP prices skyrocketing which will increase tissue producers’ production cost. Despite the tariff on US pulps, there is abundant non-US BSKP available in the international markets to meet Chinese tissue producers’ demand. Therefore, the supply and price of BSKP in China is unlikely to change significantly.


 

US-China trade war

Since January 2018, the world’s two largest economies, the US and China, have been on a trade war. Numerous tariffs and restrictions have been imposed on goods traded between the two countries including pulp & paper products. Figure 1 presents the chronology of US-China war related to the wood pulp, RCP and tissue products. At this stage, it’s not easy to evaluate the exact impact of the trade war on the paper and board (P&B) industry, but it seems that the Chinese P&B industry has taken a bigger hit than the industry in the US. 2018 turned out to be very disappointing for the P&B industry in China. According to China Paper Association the total P&B demand declined by -4% comparing to 2017 and the production declined even further, by -6%. In comparison, for the last decade before the trade war in 2018, the P&B industry in China was growing at roughly +4% per year. However, according to the China Household Paper Industry Association (CNHPIA) tissue demand was fortunately still growing, increasing from 8.5 million ton in 2017 to 8.9 million ton in 2018 at +4.5%. It may appear to be rather good growth but when comparing to the CAGR of 8% in the past decade, the growth has slowed down substantially. In the US side, the trade war seems to have had a minor impact on the P&B market. The P&B demand in 2018 continued the stagnation trend since 2012. Tissue consumption grew marginally by 67 thousand ton totaling 7.1 million tons in 2018. If one moves the focus to international tissue trade, it’s not difficult to anticipate that the tissue trade between the two countries will be negatively influenced particularly concerning the escalating tension.

Low RCP prices will benefit particularly the AfH and private label segments

Even though tissue products are not traded as much as other P&B grades globally, the international trade (trade over any foreign border) of tissue products has increased steadily at 4-6% annually since 2000. In 2018, the global trade of parent rolls totaled roughly 3 million tons and of the finished products more than 5 million tons. The fact that tissue converting operations are often integrated with tissue manufacturing subsequently limits the net trade of jumbo reels more than that of finished goods. Main trade flows are between the US and Canada, within Southeast Asia and within EU countries. In 2018, the Chinese tissue capacity totaled 13 million ton/year, which is much higher than tissue demand in the country. The increasing pressure of oversupply in the domestic market pushes Chinese producers to explore overseas export possibilities.

China has succeeded to export both jumbo reels and finished goods across continents even though the export value due to the obviously rather high transportation cost, is very low compared to the volume of the total tissue business in China. Currently the main trade partners for China are North America and Asia-Pacific. US has been a net importer of tissue, particularly finished products. China has been the single largest exporter of finished products to the US. Figure 2 presents the tissue trade between China and the US. The trade of tissue parent rolls between China and the US is marginal, but in 2018 China exported about 330,000 tons of finished products to the US (our number is somewhat higher than reported by CNHPIA due to differences in determining the article numbers included from the statistics). In July 2018, US hit China with 25% tariff on among many other products tissue parent rolls and converted products. In retaliation, China also increased tariff from 5% (for MFNs) to 20% on the US tissue products effective in September 2018. An additional 5% will be imposed in December 2019. The imposed 25% tariff will remove the cost advantage from the Chinese exporters; as a result, in 2019 the tissue trade between the two countries is likely to decline. In fact, the 25% tariff has already driven down the export from China to the US. In the first half of 2019, from the same period in 2018, China’s export of tissue paper to the US has reduced by 29.97% (CNHPIA). These volumes are replaced by imports from other Southeast Asian countries.

Fig. 2 - Tissue trade between US and China in 2018. Source: Comtrade, finished goods include all traded tissue articles under HS 4818.

China solid waste ban

2018 has been an extraordinary year in many ways. Besides the escalating US-China trade war, the China solid waste ban has also caused turmoil to the global P&B industry. On 1 January 2018, China implemented the National Sword policy to restrict a variety of solid waste import including plastic, metal and recovered papers (RCP) to reduce pollution and prevent illegal waste smuggling. This is the strictest waste import regulation China has implemented so far and the government has shown great determination this time. The key restrictions against RCP can be summarized as following: unsorted/mixed RCP is banned for import to China; the allowed contamination level for imported RCP is reduced to 0.5% from 1.5%; import license is only granted for P&B mills with capacity > 50,000 t/a and it is not granted for traders or other middlemen. Moreover, on 16 June 2018 the Chinese government published a number of new instructions on pollution prevention and control, the significant drop in RCP imports could now even be followed by a total ban of imports by the end of 2020. Imported RCP is an important fibre source for Chinese P&B industry. Since 2009, the import level has been kept at a rather consistent level. In 2017, the total demand for RCP in China was 79 million tons, of which more than one third is satisfied by the imported RCP (25.7 million tons). In 2018, the imported RCP to China was around 17 million tons, reduced by 9 million tons comparing to 2017. The considerable reduction in RCP import has driven the prices of domestic RCP soaring. Consequently, the Chinese P&B producers, especially RCP based producers have been forced to take downtime whether due to RCP shortage or the outrageous RCP prices. However, the RCP ban had minimal impact on the tissue industry. RCP represents less than 7% of the fibre raw material used in the tissue industry in China. This is because by regulation RCP can only be used in toilet paper and hand towel production. In addition typically RCP is used in AfH sector which only accounts for about 12% of the total tissue market in China albeit growing fast. High grade (HG) is the most commonly used RCP grade in tissue. As presented in Figure 3, China imported only 0.7 million tons of HG RCP in 2018. In conclusion, Chinese tissue industry should be able to find alternative fibre sources fairly easily if imported RCP is totally banned, be it domestically collected RCP, virgin wood pulps or often also non-wood pulps.

Fig. 3 - China RCP import by grade

In the US, RCP has been widely used in the tissue industry, accounting for roughly 30% of the fibre raw material. Excessive supply and low RCP prices as a result of the China ban may cause changes in fibre furnishes in the tissue industry. US has been the largest RCP exporter to China, but the exporting volumes from US to China have reduced by almost 6 million tons in 2018 due to the ban. Part of the volumes found new destinations such as Southeast Asian countries and India. But even these countries are following China’s step and restricting the import of RCP. Since the ban, RCP prices in the US especially unsorted RCP prices have plunged. Unsorted RCP prices dropped to negative because collectors have to pay for landfilling. The extraordinarily low RCP prices have attracted some of the tissue producers to use mixed RCP in their tissue production.
For example, Essity is upgrading its operation in South Glens Falls, NY to be able to use more residential curbside material to produce AfH towels. Using low priced mixed RCP can significantly reduce the cost structure of tissue producers; more tissue producers can be motivated to use mixed RCPs.

The supply and price of BSKP in China is unlikely to change significantly

BSKP export to China

Market pulp

The trade war has not spared the market pulp either, China had imposed a 5% tariff on US imported pulps since September 2018 and will add an additional 5% tariff effective in December 2019. BSKP and fluff pulp have been the main pulp grades the US is exporting to China. In fact, the US has been the largest BSKP exporter in the world, accounting for about 25% of the global traded BSKP. Meanwhile, China is the largest BSKP importer globally, importing roughly 8 million tons of BSKP in 2018 which is correspondent to 35% of the total traded BSKP. Figure 4 presents the BSKP import development in China. In 2018, US exported about 1.5 million tons of BSKP to China, representing almost 20% of China’s total BSKP import.

The US has clearly been an important BSKP supplier for China, but when subjected to 10% tariff, US BSKP will lose its price competitiveness. The bad news is that there are plenty of alternative BSKP suppliers, e.g. from Canada, Nordics, Russia and Chile that Chinese companies can turn to. The implications to the US BSKP producers are that either they have to bear the tariff themselves in order to keep their price competitiveness, or they need to look for new markets. Southeast Asia could be one of the potential markets, but the potential is limited because nearly all the annual demand growth in market BSKP globally comes from China, while other Asian markets are rather stagnate. On the other hand, this is probably good news for the US tissue producers. The excessive pulp supply in the domestic market will likely to drive down the BSKP domestic prices. Southern US is the most significant fluff export region; US fluff producers are in a bit better situation as US exports such large volumes of fluff that replacements cannot be easily found in short term. There is an upside export potential for non-US fluff producers such as Stora Enso and CMPC.

 

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